NEW YORK--(BUSINESS WIRE)--Fitch has affirmed the following Ulster County, New York general obligation (GO) bond ratings at 'AA-':
--Approximately $48.7 million GO bonds, series 1999 and 2012 bonds;
Fitch also affirms the county's Issuer Default Rating (IDR) at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from the county's full faith and credit and taxing power, subject to state statute limiting property tax increases to the lesser of 2% or an inflation factor (the tax cap law). The limit can be overridden by a 60% vote of the county legislature.
KEY RATING DRIVERS
The 'AA-' GO and IDR ratings are supported by the county's sound budget management and sound reserve levels complimented by a significant legal ability to increase revenue. The county's economic base is diverse but supports a relatively slow level of revenue growth. The long-term liability burden is low and carrying costs for pension and debt service costs account for a modest portion of general fund expenditures.
Economic Resource Base
The county benefits from its proximity to the New York City metropolitan region and the presence of the state government in Albany and an economy based on tourism and agriculture. The total population of 180,143 has declined slightly (1.3%) since the 2010 Census. Wealth levels are average compared to state and national levels.
Revenue Framework: 'aa' factor assessment
Fitch anticipates the continuation of steady but somewhat slow revenue growth in line with changes in inflation. This expectation is supported by historical revenue performance and recent improvement in the local tax base and sales and hotel tax collections. The county's revenue framework is supported by a significant legal ability to increase property tax revenues under the provisions of the New York State tax cap.
Expenditure Framework: 'aa' factor assessment
Fitch views the county's ability to reduce operating spending to help address potential budget gaps as satisfactory, and carrying costs for debt service, pension and other post-employment benefits (OPEB) are modest.
Long-Term Liability Burden: 'aaa' factor assessment
The long-term liability burden is low compared to the county's personal income and expected to remain relatively stable based on future capital needs and borrowing plans and the funded status of state-administered pension plans the county participates in.
Operating Performance: 'aa' factor assessment
Fitch believes that the combination of the county's solid reserve levels and its ability to increase revenues and reduce expenditures results in a very strong capacity to manage through moderate economic downturns while maintaining an adequate level of fundamental financial flexibility.
RATING SENSITIVITIES
Revenue Outlook: Prospects for improved long-term revenue growth absent policy action could result in positive rating action.
Financial Flexibility: The current IDR and GO rating assumes the county will continue to manage its finances in a prudent manner and maintain compliance with formal reserve policies which Fitch believes establishes an adequate financial cushion against revenue risks in a moderate economic downturn.
CREDIT PROFILE
The county's stable economic base is anchored by the State University of New York (SUNY) New Paltz with enrollment of almost 7,700 students and the New York State Correctional Department which operates four major detention facilities and employing approximately 1,740 people. The largest taxpayer is the City of New York's Bureau of Water followed by New York State. Tourists are drawn to the area by Woodstock, a large arts and cultural center, and the Catskills and Shawangunk Mountains. The county reports steady growth in the hotel and tourism industry including new resort developments currently under construction. Unemployment rates have generally trended slightly below the state's unemployment rate.
Revenue Framework
General fund operating revenues are derived from a mix of sales taxes which account for 35% of the county budget followed by state and federal aid at 28% and property taxes at roughly 24%.
Historical general fund revenues had generally trended at or near the level of inflation through 2013 before a significant 11% decline in 2014 due to various policy actions including but not limited to the sale of the county nursing home, privatization of mental health services and a several-month delay in the reauthorization of the county's 1% sales tax rate by the state. As a result the audited 10-year general fund revenue CAGR registered a low 1.9% - below the level of U.S. inflation.
In the absence of the reauthorization delay, Fitch believes the county would have maintained a moderately higher level of revenue growth based on economic trends. Sales taxes grew by 7% from 2011 through 2014 and unaudited 2015 results indicate 3.2% growth in sales tax collections. The property tax levy has been relatively flat due to modest declines in taxable assessed values (AV), which has only recently turned a corner with solid growth of 7.7% in 2016. The county has decided to forgo the opportunity to record higher revenue associated with the AV increase in favor of tax relief. Fitch believes that the county's prospects for revenue growth will be in line with inflation over the near term given positive sales tax collections, improved AV trends, increasing tourism activity and ongoing development in the local economy.
New York State law requires property tax revenue increases be limited to the lesser of CPI or 2% annually, unless a supermajority of the local governing body vote for a larger increase. The ability to override the cap provides substantial legal flexibility to raise revenues for the county. Additionally, the county has the ability to increase other fees and departmental revenue. Sales tax rates are controlled by the state legislature. The county has a base sales tax rate of 3% and an additional 1% sales tax rate that requires periodic extension. The 1% sales tax rate will be up for renewal in November 2017.
As part of the expansion of New York State gaming, a casino is being developed in nearby Sullivan County. Under state law, neighboring counties are entitled to a share of the tax revenues generated from casinos for impact costs. Ulster County expects to receive $1.5 million to $2 million per year (less than 1% of general fund revenue) as its share in revenue once the facility is operating. Ulster County plans to use these funds to supplement operating needs.
Expenditure Framework
The county's expenditure flexibility is solid given low carrying cost for pension, debt and other post employment benefits (OPEB) and satisfactory ability to reduce operating costs to eliminate budget gaps. Fitch expects the rate of expenditure growth to remain in line with revenue growth based on current staffing and service levels.
The majority of the county's expenditures are for economic assistance and social services (35.5%), general government expenses (19.5%), and public safety (9.7%). Employee wages and benefits are up 1% in the 2016 budget and account for approximately 45% of total spending. The county plans on keeping current service levels but streamlining certain operations through consolidations of contracts and other operational improvements.
Fitch believes that expenditure flexibility is solid despite mandated service costs. The county has reduced full-time staffing levels to 1,331 from 1,900 over the past six years. Staffing reductions have largely been achieved through attrition and elimination of vacancies. Over 300 positions were eliminated through the sale of the county-owned nursing home in 2013. The majority of employees are represented by labor unions. Most labor contracts have been settled with the exception of one which has been expired since December 2015. The county has a history of negotiating modest salary increases in exchange for modest benefit concessions including higher health care contributions.
The county also has the flexibility to reduce budgeted capital expenditures in the general fund to close budget gaps. The majority of the $16 million in appropriated fund balance in 2016, equivalent to 5% of spending, was budgeted for one-time capital expenditures and infrastructure projects. Debt service, pension contribution and OPEB costs account for a modest 10.1% of general fund expenditures. Pension and OPEB payments are expected to remain modest in future years due to the decrease in staffing levels over the past several years. The county has not taken advantage of the option of amortizing or smoothing pension payments provided by the state.
Long-Term Liability Burden
Fitch estimates the county's overall debt and its proportionate share of the net pension liability of the New York State Local Employees Retirement System (NYSLERS) at 4.2% of personal income. Fitch expects the county's long-term liability burden will remain low due to limited future borrowing plans and a well-funded state pension plan. The majority of the overall debt is overlapping debt of various school districts, towns, villages and the city of Kingston. The county's future debt plans are modest including $20.3 million in authorized but unissued debt. The 2016-2021 capital improvement plan includes $175 million in planned projects; however, this excludes state and federal grants which the county expects would significantly reduce the par amount of tax supported debt. Amortization of outstanding principal is rapid with 80% paid in 10 years.
NYSLERS is a cost-sharing multiple-employer defined benefit pension plan. As of March 31, 2014, the plan was 84% funded assuming a 7% rate of return. The county pays 100% of actuarially required annual contribution. OPEB is funded on a pay as you go basis as there is no authority under present state law to establish a trust account or reserve for this liability. The unfunded OPEB liability as of Dec. 31, 2014 was $127.9 million, equivalent to 1.7% of personal income.
Operating Performance
Fitch assesses the county's inherent budget flexibility as superior given the county's strong legal ability to increase revenue and reduce expenditures. The county maintained satisfactory reserves throughout the most recent economic downturn and Fitch believes this trend will continue given its inherent budget flexibility. Available general fund balance has been strong at over 10% of spending since 2011. The county has a policy of maintaining unassigned general fund balances of 5% to 10% of expenditures. Fitch views the lower end of the policy as consistent with an 'aa' operating performance assessment taking into consideration the county's inherent budget flexibility and potential revenue decline in a moderate economic downturn.
The county is expected to maintain satisfactory reserves despite the use of reserves in 2014 and 2015 for capital projects. In 2015 the county had appropriated $20 million in fund balance for one-time capital projects including road improvements but replenished the majority of the appropriation through expenditure reductions. The county held numerous positions vacant, privatized mental health services and consolidated contracts for savings.
Unaudited results for 2015 indicate a $4 million operating deficit after transfers and an available general fund balance of $42.6 million or 15.8% of spending. The balance includes $1.5 million in a restricted tax stabilization reserve recently established to offset state actions that could negatively impact finances including additional unfunded state mandated services. The 2016 adopted budget appropriated $16 million in general fund balance; however, based on year-to-date results management anticipates replenishing at least half of this amount through budgetary savings and increased sales tax collections.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478
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